Anybody who has ever waited for a paycheck can relate to what carriers, brokers and trucking companies go through each time a shipment gets dropped off. But, for truckers, their wait isn’t just a few hours or a day or two. It could be many days, sometimes many weeks. And when you have a business that is quite often turning that money over to use on the next shipping assignments, that wait can be devastating financially. Freight factoring provides a way for carriers and brokers and trucking companies to get paid much faster and use that cash to keep up with an extensive list of expenses for the next trip.
This article takes an in-depth look at freight factoring, how much of a charge comes with it, and how fees work when going that route.
What are Freight Factoring Fees?
After dropping off a shipment, the carriers and brokers are paid for the delivery service by a shipper or broker. But that can typically take 30 to 90 days to finally reach the carriers and brokers or trucking company. To be compensated much faster, they can go through a freight factoring company, which pays the trucker almost immediately, sometimes as little as an hour after delivery. That third-party company takes on the responsibility of collecting the payment from the shipper at a much later date. The factoring company takes a fee for the service, usually a percentage of the load invoice.
So why would carriers and brokers or trucking company want to give up that percentage? Let’s take a look at some of the reasons why:
- The money is needed immediately to pay for bills that are due or overdue and to pay for expenses for the next trip.
- Because the carriers and brokers or trucking company is in a situation where they can’t obtain financing through a bank or the interest rates are too high to make a loan feasible.
- There are not enough staff or technological capabilities to manage payment collections, i.e., trying to track down the money shippers owe.
- Having cash in hand allows for planning overall growth or future expansion.
How Much Do Freight Factoring Companies Typically Charge?
Freight factoring companies typically take between 1% and 5% of the invoice’s total value. The percentage can differ from company to company and fluctuate depending on whether there are fees for any additional services. Other aspects can alter the factoring rate:
- The size of a shipment – A larger, more-expensive shipment generally translates into a lower percentage fee.
- The risk involved – Some types of businesses involved in the invoice can be riskier and thus might affect the on-time payment of the invoice.
- The time it takes to receive compensation – Factoring rates can be based on time frames. With variable factoring rates, the percentage of the invoice the factoring company takes can increase with set time frames. For example, if the invoice gets paid within the first 30 days, the rate is 2%. But that can be raised a percentage point or more depending on when shippers settle the invoice.
How Are Freight Factoring Fees Calculated?
While one of the reasons to use a freight factoring company is to help carriers and brokers or a trucking company with cash flow management, it’s important to understand exactly how much cash you will be getting to flow back into the company. Here’s a real-life example: The total value of a billing invoice is $7,000, and the freight factor’s percentage is an agreed-upon 3%. That means the carriers and brokers’ payout soon after the shipment is delivered will be $6,790, and the cost of hiring the freight factoring company is $210. But remember there can be assorted other fees that the freight factoring company might add on in certain circumstances.
What Are Other Freight Factoring Costs to Consider?
There are quite a few extra fees that can be added to a contract with a freight factoring company. They can be costly and sometimes unnecessary, so it is important to read all the paperwork carefully before you sign up or renew a contract. Here are some of those fees:
- Application fee – This is usually a one-time fee when you sign up for freight factoring. This payment demonstrates you are amenable to entering into the contract.
- Setup fee – This is also commonly a one-time fee. Often it is used for the processing of legal papers and to provide reports.
- Credit check fee – Credit checks are run on both the carriers and brokers and the customer to ensure the shipper has the money to pay and the carriers and brokers have enough to repay if the shipper fails to do so.
- Processing fee – This fee covers processing your application. carriers and brokerss and trucking companies must provide two essential documents: an invoice and a bill of lading.
- Due diligence fee – Paid to express interest in a slot with the factoring company and to secure it if needed.
- Wire transfer fee or money disbursement fee – Like with most other money transfers today, these fees ensure the money goes through correctly.
- Late fee – When the shipper does not pay on time, this fee is charged and builds up depending on how long the debt remains unpaid.
- Customer service fee – Some factoring companies charge a fee to use their customer service.
- Minimum volume requirement – Some factoring companies have a requirement that factors in a certain number of invoices per month. If the carriers and brokers do not meet the minimum number of invoices, they will incur a fee to compensate for the lost profit.
- Cancellation fee – Many factoring companies require you to sign a contract that will expire after a specific number of years. If the carriers and brokers or trucking company decides to terminate before the end of the agreement, they will be required to pay penalties.
- Invoice discounting rate – In a process that is sometimes called “discreet invoicing,” a trucking company implements invoice discounting. It asks the factoring company for a specific amount of money, then uses the invoice as collateral. The trucking company keeps control of the ledger, and the consumer does not know that another financial transaction is taking place.
What Are Freight Factoring Fee Paybacks?
Freight factoring fee paybacks come into play when the freight factoring company cannot recoup its money from the customer who received the shipment. Depending on the contract terms, the carriers and brokers or trucking company can be on the hook for payback of specific fees, such as late fees, for however long it takes for the freight factoring company to be released.
The Cost of Recourse and Non-Recourse Freight Factoring
It’s extremely beneficial to pay attention to the fine print regarding the policies of recourse and non-recourse. Recourse refers to a legal agreement that gives the freight factoring company the right to pursue the carriers and brokers or trucking company if the customer cannot pay off the invoice. A non-recourse clause prohibits the freight factoring company from going after the carriers and brokers or trucking company if the customer doesn’t pay. But almost all non-recourse provisions apply only if the shipper files for bankruptcy before payment to the freight factoring company is due. The carriers and brokers or trucking company are obligated to pay if shippers don’t.
Frequently Asked Questions About Freight Factoring
Here are several questions carriers and brokers and trucking company executives ask regarding freight factoring.
Do I Pay Interest on Freight Factoring?
Almost always, the answer is no. The only money the freight factoring company should receive is a fee agreed upon ahead of time for a percentage cut when the invoice gets paid. Only on the rare times when a shipper is taking too long to pay the invoice will that percentage rate be raised.
Is Freight Factoring Considered A Loan?
Freight factoring is not a loan. The money the freight factoring company gives you is yours. The percentage of the invoice taken out is the only payment you make to them, except if there is a problem with the shipper not paying the invoice.
How Much Do Freight Factoring Companies Charge, and How Do Fees & Payback Work?
Charges by freight factoring companies usually range between 1% to 5% of the invoice’s value. Those charges can vary from company to company, so it’s best to research and find a reliable factoring company that can offer you an affordable price. Additional fees may apply for other services included in the deals with freight factoring companies.
What is a Typical Freight Factoring Fee?
Typically, the freight factoring fee is 2% or 3%. But that percentage shouldn’t be the only determining factor. It is crucial to ensure the factoring company is dependable and doesn’t try to add on an unreasonable set of special fees that will wipe out any percentage savings you might have expected.
What is Freight Factoring?
Freight factoring allows carriers and brokers or trucking companies to get paid sooner once they have delivered a shipment. They no longer have to wait weeks and sometimes months for their payment. In exchange for a small percentage fee of the shipment’s invoice, a freight factoring company will pay them within hours after delivery and then handle the hurdles of getting the payment from the customer.
Put Freight Factoring to Work for You
Freight factoring can be a way for carriers and brokers and trucking companies to get paid immediately and use that money for the next haul or to help them plot out growth in their business. It also relieves them of the lost time and headaches of trying to ensure the invoices get paid. Carriers and brokers and trucking companies must remember that it does cost them a percentage fee and that there are often extra costs lurking in the contracts. But ComFreight, a digital payment and finance solution for the transportation industry, has another option. HaulPay is ComFreight's solution for the problem of wanting consistent fast payment on all of the loads that you hau. Also, it provides a suite of features built into our app for you to request payments, connect customers to your account to check credit, and track your income and payment history with HaulPay. To learn more about the app, visit our HaulPay webpage.